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Friday, April 29, 2011

Tommy Hilfiger case analysis and strategic review

General Information

Arvind Brands Ltd, a wholly-owned subsidiary of Lalbhai Group flagship Arvind Mills based in Ahmadabad, was established in the year 1993 with the launch of Arrow. Arvind Brands today is one of the largest branded apparel manufacturing and marketing companies in India. The company brings to the Indian consumer a host of international and national brands, ranging from premium to mass market. The two licensed brands Arrow and Lee are market leaders in the premium men's formalwear and Jeanswear segments, respectively. Newport, the homegrown brand is the market leader in the mass-market casual wear segment. Other brands include Excalibur, Flying Machine, Ruggers and Wrangler. (investor.tommy.com)

Tommy Hilfiger Corporation, through its subsidiaries, designs, sources and markets men's and women's sportswear, Jeanswear and children wear under the Tommy Hilfiger trademarks. Through a range of strategic licensing agreements, the Company also offers a broad array of related apparel, accessories, and footwear, fragrance and home furnishings. The Company's products can be found in leading department and specialty stores throughout the United States, Canada, Europe, Mexico, Central and South America, Japan, Hong Kong, Australia and other countries in the Far East, as well as the Company's own network of outlet and specialty stores in the United States, Canada and Europe.(investor.tommy.com)

Discussion Questions:

1.Evaluate the long-term implication of the decision of Tommy Hilfiger to sell the rights to Mr. Murjani for Tommy Hilfiger products in India.

One of the major implications of the decision of the Tommy Hilfiger to sell the rights to Mr. Murjani for Tommy Hilfiger products in India is that India is the one of the biggest growing market in the world and it has lots of growing business possibilities and market. By selling the rights to Mr. Murjani, Tommy Hilfiger opened door for the new market. Beside this, Tommy Hilfiger is able to choose a manufacturer (i.e. Murjani) that has the skills and experience necessary to make its product. Furthermore, after selling the right to Murjani, Tommy Hilfiger can increase the brand exposure and generate extra revenues from the new market by enhancing brand image. Furthermore, Licensing out is not only a good and easy way for a company like Tommy Hilfiger to reap the benefits of globalization but also it enables a way to capitalize on the potential of foreign markets. Licensing to other foreign firms for production and distribution to different populations can enable a company to further profit from its technology while protecting itself from the overhead required to participate in foreign markets. By licensing out its technology, Tommy Hilfiger may generate income from unused portions of its intellectual property. In addition to making this potential energy kinetic, licensing enable a company to exploit other markets by allowing the licensee to apply the existing technology to a different market. When an invention is useful to several industries, licensing can prove profitable to both the licensor and the potential licensee as experts in separate fields. (Fernandez D.)

Some of the negative implication of the strategic licensing agreement is that Tommy Hilfiger may lose its brand identity in the future due to the lack of control over its international operations. Furthermore, Tommy Hilfiger may create its own competitors for very negligible portion of royalty in long run.

“Every licensee is a potential future competitor of the licensor. If the original licensing agreement does not stipulate the region within which the licensee may market the licensed product, the licensee could create problems for the licensor by insisting on marketing the product in third –country markets in competition with products already served in the market by the licensor”.(Phatak V. A., Bhagat S.R., Kashiak J. R.)

Another major limitation or negative implications of the Licensing is that the licensee may refuse to pay the regular royalties claiming that they have changed or altered the original service, product or the technology and the original product or the technology is no longer in used in the production or the manufacturing process. Beside this, because the royalty is usually paid in the local currency therefore, devaluation in the local currency may cause the decline in the value of the royalty in the home country currency. (Phatak V. A., Bhagat S.R., Kashiak J. R)

2.What should Tommy Hilfiger consider in the licensing agreement with the Arvind Group?

The licensing agreement is a complex legal document that begins by identifying parties to the agreement, as well as the dates of the agreement. It specifies the subject matter to be licensed, including patents and trade secrets. Beside this, the provisions or rights of the license, such as whether it grants exclusive rights or is subject to other agreements should also be specified. Any limitations, such as territorial and quantity restrictions, are also specified. A final section can specify duration, termination, and related provisions of the agreement. (referenceforbusiness.com)

In business, licensing agreements or arrangements are mutually beneficial. The licensor (Tommy Hilfiger) provides property right and the licensee contributes expertise in the particular industry or territory covered by the licensee. The resulting relationship becomes much the same as a joint venture or partnership. Licensing agreements include several types, including copyright licensing, patent licensing, merchandise licensing, trademark licensing, and software licensing. (referenceforbusiness.com)

It is important that proceeding with a prospective Licensing Agreement is done so with caution. Tommy Hilfiger must carefully consider every condition and term they wish to include in the agreement. Things to consider include the royalty percentage willing to be settled for and the initial term of agreement, meaning the length of time the initial term of the contract is to be for, in months or years. Tommy Hilfiger should also include clauses/articles that protect them from law suits of any kind that might arise, as a result of the marketing practices of the manufacturing company. Tommy would also need to be able to terminate the agreement in writing; in the event the manufacturer i.e. Arbind Group does not honor the agreement. Non-compliance can be due to non-payment of royalties or by not fulfilling a minimum sales requirement, in order for the agreement to remain in force, should this be included. Terms would however need to be reasonable and workable and not so strict as to cause disinterest by potential manufacturers in entering into a contract to market an invention. An inventor (Tommy Hilfiger) can study licensing agreements through search online and/or consult with an attorney who is experienced in composing and executing marketing contracts. (Lowrance J.) Licensors should also ensure that their business partner’s plans for expansion do not clash with their own. If a licensee starts to run a competing business side-by-side then the trademark owner or the Tommy Hilfiger can lose both credibility and business.” (Liu Twiggy). Therefore, Tommy Hilfiger should consider the future business plan of the Arvind Group.

In addition to this, when considering a licensing strategy, Tommy Hilfiger should look closely at how the licensing program will fit into the overall business plan of the company. The most ideal strategy should not only compliment but enhance a company's product line while providing an even more attractive position for the company along with the market in which it participates. Another good piece of advice is to use particularly stringent terms of licensing agreements when dealing with competitors. Additionally, if a company is attempting to license a technology that has been standardized, then it may be wise for it to decide not to compete with its licensees by avoiding the manufacture and sale of products in the markets where it knows it has licensed technology. Making a market or territory restriction in the licensing terms may prove beneficial to both parties as well.

3.How can Tommy Hilfiger ensure its brand reputation in India?

One of the principle and essential elements of a licensing agreement is the notion of “quality control.” The licensor Tommy Hilfiger must have mechanisms in place to ensure quality control standards and consistency in all licensed products. These standards must be outlined in the licensing agreement, and will serve as the guidelines for the proper use by the licensee for the remainder of the life of the license. In the written agreement, quality control measures should include: submission of product samples prior to approval, allowances for regular inspection of the licensee’s facilities, and the right of the Tommy Hilfiger to approve any product developed by the licensee. In accordance with the Lanham Act - the principle legislation concerned with trademark rights - licensors have the responsibility to control the use of their marks, or else face possible abandonment and loss of the mark. (John Jennings) Furthermore, to ensure the brand reputation Tommy Hilfiger should consider the Indian markets behaviors and they should have trademark usage guidelines. They should understand the risk of the market and should ensure that the licensee have criteria for selecting suppliers.

A serious problem of reputation could occur if a multinational company does not retain control over the production and marketing of its products by the licensee. A company can retain control over the production by providing for quality control in the agreement. Agreement could be reached with the licensee that provides for the permanent station of technical representative in the licensee’s plant to check on the quality of the products produced or the process being used. Alternatively, Tommy could visit to the production site and to the company’s production and quality control personnel that also could help the marketing of inferior-quality products. ”.(Phatak V. A., Bhagat S.R., Kashiak J. R.)

4.Can Tommy Hilfiger control the operations of Arvind Brands?

No, Tommy Hilfiger cannot control over its operation of the licensee because it is one of the major risks and disadvantages to licensing in terms of control mechanism. In this case, Tommy Hilfiger may lose control over the manufacture and marketing of its goods in India. As a mode of international market entry, licensing also may be less profitable than other choices because returns must be shared between two parties. Beside this, there is a risk that the foreign licensee may sell a similar kind of competitive product after the license agreement expires. Other risks and issues involve selecting a partner, as well as all of the general uncertainties in doing business with an international partner, including language, culture, political risk, and currency fluctuations. (referenceforbusiness.com)

Limitations of licensing include lack of control over manufacturing, quality, and marketing. More importantly, the licensee may become a competitor if too much knowledge and know-how is transferred.

Licensing tends to be more passive form of international operations, so that it is easy to slip into an arrangement whereby the market is totally left to the licensee to develop. For example, one respondent company had commented: the licensing deal is good arrangement because there is no work for licensor to do. The income just keeps on flowing to licensor. In this case of Tommy Hilfiger, the firm was undertaking no information gathering or any other activity in the licensed foreign market. The market had been left completely to the licensee.Usually the licensor was almost totally passive in the arrangement. (Buckely P., Pervez N Ghauri)

Therefore, applying strategic licensing agreement Tommy Hilfiger cannot control over the operation system of the Arvind Brands because licensing is one of the easy way to enter the international market and usually Licensor lose the control over its operations in this kind of strategy. To gain control over the operations of the Arvind Brands Tommy should move to equity international venture and share the riskand investment of the business equally.

5.Given the expansion in 2006 and 2007, should Tommy Hilfiger consider the equity international joint venture option?

Given the expansion in 2006 and 2007, Tommy Hilfiger will be better off if it goes for joint venture options because by doing so it can:

Beside this, the company is growing rapidly during 2006 and 2007 that the retailer launched four new outlets in India, in Ahmadabad, Bangalore, Delhi, and Lucknow. These sites are in addition to stores already located in Bangalore, Chandigarh, Gurgaon, Hyderabad, and Kolkata. As of 2007, all nine Hilfiger outlets in India were franchised. The more new outlets opened, the more Tommy needs control over its operation for quality and control purpose. Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets. One of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project. By going into joint venture Tommy Hilfiger can cut the costs of doing business as a way to save money.